50.6 Situation in Ukraine

During the 12-month period ended on 31 December 2017, Ukraine experienced noticeable improvement in the economic situation. Major achievements included: extension of cooperation with the International Monetary Fund, introduction of pension reform, an increase in the minimum wage, introduction of visa-free travel to the European Union. The government’s efforts were summarized among others, by an improvement in Ukraine's position in the Doing Business rating (from 153th to 76th place), an increase in the National Bank’s foreign exchange reserves (by 21% compared to 2016) and an increase in retail trade (by 8.8% compared to 2016). The factors that slowed down economic growth and had an adverse effect on the stabilization of the country included: protracted armed conflict in the eastern part of the country (according to estimates of national experts, the economic blockade of the eastern parts of Ukraine reduced GDP growth by at least 1%) and insufficient implementation speed of other reforms (privatization, land trading, anti- corruption court law). The country’s growth and economic balance is also adversely affected by Ukraine’s growing debt (USD 76.31 billion as at 31 December 2017), of which the largest amounts must be paid between 2018 and 2020.

The insurance market operated in an environment with a high level of costs of selling insurance products, inflation growth (up to 13.7% in 2017, compared to 12.4% in 2016), volatile exchange rates and further changes in the banking market (with 9 banks deemed insolvent in 2017 and ceasing their operations). Following the nationalization of the largest commercial bank (Privatbank), the State Treasury of Ukraine controls 51.3% of the banking sector. As a result of the above, individuals and corporations had a moderate level of confidence in the financial and insurance sector. The cyber-attack of a “Pety.A” computer virus, which in June 2017 impacted numerous state institutions and private businesses was an additional challenge for the Ukrainian economy.

Despite these circumstances, PZU Ukraine and PZU Ukraine Life, by diversifying their portfolios and sales channels, were able to respond with flexibility to market changes and fulfilled their respective sales plans in 98.4% and 122.8% (growth vs. previous year was 115% and 122%, respectively).

The Management Board of PZU, in cooperation with the management of PZU Ukraine and PZU Ukraine Life, monitors external risks and changes in Ukrainian legal regulations on an ongoing basis. Response scenarios have been prepared for market changes and control mechanisms. PZU does not intend to withdraw from the Ukrainian market. As at the date of signing of the consolidated financial statements, the PZU Management Board assumes that further activities of PZU Ukraine and PZU Ukraine Life will be continued in accordance with the adopted assumptions. However, the economic instability in Ukraine related to the armed conflict and the presidential and parliamentary elections in 2019 may adversely affect the future financial standing and performance of PZU Ukraine and PZU Ukraine Life in a manner that currently cannot be reliably predicted. These consolidated financial statements reflect the PZU Management Board’s current assessment in this respect.